1. Chapter 23: Statement of Cash Flows
Intermediate Accounting, 11th ed.
Kieso, Weygandt, and Warfield
Chapter 23: Statement of Cash Flows
Prepared by
Jep Robertson and Renae Clark
New Mexico State University 2

2. Chapter 23: Statement of Cash Flows
After studying this chapter, you should be able to:
Describe the purpose of the statement of cash flows.
Identify the major classifications of cash flows.
Differentiate between net income and net cash flows from operating activities.
Contrast the direct and the indirect methods of calculating net cash flow from operating activities.

3. Chapter 23: Statement of Cash Flows
Determine net cash flows from investing and financing activities.
Prepare a statement of cash flows.
Identify sources of information for a statement of cash flows.
Identify special problems in preparing a statement of cash flows.
Explain the use of a work sheet in preparing a statement of cash flows.

4. Usefulness of the Statement of Cash Flows
The information may help users assess the following aspects:
The entity’s ability to generate future cash flows
The entity’s ability to pay dividends and meet obligations
The reasons as to why net income and net cash flow from operating activities differ
Cash and non-cash investing and financing activities during the year

5. The Cash Flow Statement
The cash flow statement provides information about:
the cash receipts (cash inflows), and
uses of cash (cash outflows) during the period
Inflows and outflows are reported for:
operating activities,
investing activities, and
financing activities during the period

6. Statement of Cash Flows: Concept
Operating
activities
Investing
Financing
inflows
Cash
Pool
Operating
activities
Investing
Financing
outflows

7. Preparing a Statement of Cash Flows
There are two methods of preparing the statement of cash flows:
the indirect method and
the direct method
The indirect method derives cash flows from accrual basis statements.
The direct method determines cash flows directly for each source or use of cash.

8. Statement of Cash Flows: Indirect Method: Concept
Earned
Revenues
Eliminate
Non-cash revenues
Net Income + -
Operating
cash flow
Eliminate
Non-cash charges
Expenses
Incurred

9. The Statement of Cash Flows: Indirect Method
Accrual Basis Statements
Cash Flow Statement
Income Statement
items & Changes in
Current Assets and
Current Liabilities
Operating activities:
Adjust net income for accruals
and non-cash charges to get
cash flows
Balance Sheet: Changes
In Non-Current Assets
Investing activities:
Inflows from sale of assets and
Outflows from purchases of
assets
Balance Sheet: Changes in
Non-Current Liabilities
and Equity
Financing activities:
Inflows and outflows
from loan and equity
transactions

10. Direct Method: Operating Activities
Inflows
Outflows
From sales of goods or services
From returns on loans (interest) and returns on equity securities (dividends)
To suppliers for inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses

11. Investing and Financing Activities
For the direct and indirect methods the sections reporting investing and financing activities are the same.
The net inflows or outflows for each section (under the two methods) are identical.
The operating activities are reported differently.

12. Format of the Statement of Cash Flows: Indirect Method
Cash flows from operating activities:
Net Income $ XXX
Adjustments (to arrive at cash flow from operations) $ XX
(List of individual inflows and outflows)
Net cash flow from operating activities $ XXX
Cash flows from investing activities:
(List of individual inflows and outflows) $ XX
Net cash flow from investing activities $ XXX
Cash flows from financing activities:
(List of individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX

13. Major Classes of Cash Receipts and Payments

14. Formula to Compute Cash Receipts from Customers

15. Formula to Compute Cash Payments for Operating Expenses

16. Indirect Method: Special Items
Note the following adjustments to net income in deriving operating cash flow:
Loss on sale of assets is added to net income
Gain on sale of assets is deducted from net income
Discount on bonds payable (as amortized) is added to net income
Premium on bonds payable (as amortized) is deducted from net income

17. Format of the Statement of Cash Flows: Direct Method
Cash flows from operating activities:
Cash receipts (individually): Inflows $ XXX
Cash payments to suppliers (separately): outflows ($ XXX)
Net cash flow from operating activities $ XXX
Cash flows from investing activities:
(List of individual inflows and outflows) $ XX
Net cash flow from investing activities $ XXX
Cash flows from financing activities:
(List of individual inflows and outflows) $ XX
Net cash flow from financing activities $ XXX

18. Direct Method: Concept
Cash Receipts
From sale of
goods and
services to
customers
From receipts
of interest and
dividends
Cash Payments
To suppliers
To employees
For operating exp
For interest
For taxes
Cash
flow
from
operations
less
equals

19. Cash Flow Statement: Direct Method
Cash receipts from customers:
= Revenue from credit sales + Decrease in A/Rec balances
- Increase in A/Rec balances

20. Cash Flow Statement: Direct Method
Cash payments to suppliers:
= Cost of goods sold + Increase in inventory
- Decrease in inventory
+ Decrease in accounts payable
- Increase in accounts payable

21. Cash Flow Statement: Direct Method
Cash payments for operating and other expenses:
= Operating expenses + Increase in prepaid expenses
- Decrease in prepaid expenses
+ Decrease in accrued expenses payable
- Increase in accrued expenses payable

22. Reporting Significant Non-Cash Transactions
Transactions not involving cash inflows or cash outflows are non-cash transactions.
They are not reported in the body of the cash flow statement.
If material, they are reported as notes to the statement or in a supplementary schedule to the financial statements.
Example: Issue of bonds (payable) for purchase of land.

23. Worksheet
A work sheet may be useful when a number of adjustments are needed.
Involves three steps:
Enter beginning and ending balance sheet data.
Enter the data that explains the changes in balance sheet accounts (other than cash).
Enter the increase or decrease in cash on cash line and at the bottom of the work sheet. This entry results in the totals of the reconciling items to agree.

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